Cintas Corporation

Good day everyone and welcome to the Cintas Corporation. Announces fiscal 2024 third quarter earnings release conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Jared Mattingly, Vice President and Treasurer Investor Relations. Please go ahead sir.

Thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer, and Mike Hanson, Executive Vice President and Chief Financial Officer. We will discuss our fiscal 2024 third quarter results. After our commentary we will open the call to questions from analysts. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward looking statements. This conference call contains forward looking statements that reflect the company's current views as to future events and financial performance. These forward looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those we may discuss. I refer you to the discussion on these points contained in our most recent filings with the Securities and Exchange Commission. I will now turn the call over to Todd.

Thank you Jared. Due to the outstanding dedication and execution of our employees, whom we call partners, we delivered very strong results for our third quarter. Total revenue for the third quarter grew .9% to $2.41 billion. The revenue dollars represent record quarterly revenue. We are pleased with the performance of each of our businesses. Our revenue growth remains robust and we have good momentum in the business. New business remains strong. Our sales team continues to operate at a high level. We are seeing broad success across the many verticals, particularly within our focus verticals, as well as our cross-selling efforts and penetration of new products and services within our existing customers. Retention levels are strong and remain at very attractive levels. Our strong revenue growth flowed through to our bottom line. Gross margin for the third quarter increased 220 basis points to a record .4% and increased to 14.9%. Operating income was a record .6% and increased of 16.6%. Deleted EPS grew a robust .3% to $3.84. Cash flow remains strong. Net cash provided by operating activities in the third quarter grew .8% over the prior year. In the third quarter, we continued to invest in our businesses through capital expenditures of $107 million. During the third quarter, we made acquisition purchases of $111 million. On March 15th, we paid shareholders $137.6 million in quarterly dividends, an increase of .1% from the amount paid the previous March. Our strong cash flow gives us flexibility to choose how we deploy our capital. And through three quarters, we have deployed over $1.4 billion of capital across our priorities of capital expenditures, acquisitions, dividends, and buybacks. I would like to thank our employees, whom we call partners, for their continued focus on our customers, our shareholders, and each other. Before turning the call over to Mike to provide details of our third quarter results, I'll provide our updated financial expectations for our fiscal year. We are increasing our financial guidance. We are raising our annual revenue expectations from a range of $9.48 billion to $9.56 billion to a range of $9.57 billion to $9.6 billion, a total growth rate of .6% to 8.9%. Also, we are raising our annual diluted EPS expectations from a range of $14.35 to $14.65 to a range of $14.80 to $15, a growth rate of .9% to 15.5%.

Mike? Thanks, Todd, and good morning. Our fiscal 2024 third quarter revenue was $2.41 billion, compared to $2.19 billion last year. The organic revenue growth rate adjusted for acquisitions, foreign currency exchange rate fluctuations, and a difference in the number of workdays was 7.7%. Total growth was positively impacted by 170 basis points due to the extra workday. We remind you as you update your models for next fiscal year that there will be two less workdays compared to this current fiscal year. Each quarter next year will have 65 workdays, which means the first and the fourth quarters will each have one less workday than this fiscal year. Organic growth by business was .1% for uniform rental and facility services, .5% for first aid and safety services, .9% for fire protection services, and uniform direct sale was down 3.9%. Gross margin for the third quarter of fiscal 2024 was $1.19 billion, compared to $1.03 billion last year, an increase of 14.9%. Gross margin as a percent of revenue was .4% for the third quarter of fiscal 2024, compared to .2% last year, an increase of 220 basis points. Strong volume growth, technology improvements, and continued operational efficiencies helped generate this strong gross margin. Gross margin percentage by business was .8% for uniform rental and facility services, .3% for first aid and safety services, .8% for fire protection services, and .1% for uniform direct sale. Gross margin for the uniform rental and facility services segment increased 170 basis points from last year. Energy was a tailwind of 40 basis points. In addition, we continue to leverage our strong revenue growth, our technology investments, and extract inefficiencies out of the business through our Six Sigma and engineering teams. Our technology investments have allowed us to improve garment sharing among our plants, which improves material costs. Our smart truck technology allows us to improve our route efficiencies and provide route densities to our existing routes, which positively impacts truck purchasing, labor, and energy. Our Six Sigma and engineering teams have helped us create efficiencies in the plant that allow us to maximize the utilization of our plant equipment, labor, and energy. Gross margin for the first aid and safety services segment increased 470 basis points from last year. Strong revenue growth continues to help expand our margins in this segment. Strong revenue performance in some of our high margin recurring revenue products, like AED rentals, eyewash stations, and water break, continues to provide a healthy revenue mix. Our technology investment in smart truck continues to provide route optimization and improve efficiencies. And our first aid dedicated distribution center allows us to lower product costs. All of these contribute to improved gross margins. Selling and administrative expenses increased 90 basis points from last year. The increase was driven by investments in selling resources, technology, and our management training program, as well as costs associated with an agreement in principle to settle the purported class action contract dispute brought by plaintiff City of Laurel. We determined that settling the claim is in the best interest of CENTAS. The total monetary payment agreed to in the proposed settlement, including the 60 basis points recognized in this quarter, is $45 million. We expect that the settlement costs will not impact our financials in future periods. As Todd mentioned earlier, we generated strong cash flow. For the year, our free cash flow increased 31.6%. This has allowed us to invest back into the business, which has resulted in capital expenditures of .3% for the year. Our investments include technology to grow the top line and expand margins, automation to improve efficiencies in our plants, and additional processing capacity where needed. We expect capital expenditures to finish around .25% of revenue for the year. Operating income of $520.8 million compared to $446.8 million last year. Operating income as a percentage of revenue was .6% in the third quarter of fiscal 24, compared to .4% in last year's third quarter, an increase of 120 basis points. Our effective tax rate for the third quarter was 19.9%, compared to .1% last year. The tax rates in both quarters were impacted by certain discrete items, primarily the tax accounting impact for stock-based compensation. Net income for the third quarter was $397.6 million, compared to $325.8 million last year. This year's third quarter diluted EPS of $3.84, compared to $3.14 last year, an increase of 22.3%. Todd provided our annual financial guidance. Related to the guidance, please note the following. Fiscal 24 interest expense is expected to be $99 million, compared to $109.5 million in fiscal 23, predominantly as a result of less variable rate debt. Our fiscal 24 effective tax rate is expected to be 20.6%. This compares to a rate of .4% in fiscal 23. Our guidance does not include the impact of any future share buybacks. As I mentioned earlier, we expect that the proposed settlement will not impact our financials in future periods, and accordingly there is no impact on our guidance. Guidance includes $17.4 million of acquired revenue for the fourth quarter. This revenue includes the impact of the recently announced acquisitions during the third quarter.

That concludes our prepared remarks. Now we are happy to answer questions from the analysts. Please ask just one question and a single follow-up if needed. Thank you.

If you would like to ask a question, please press star 1 on your telephone keypad now. Please be prepared to ask your question when prompted. You will also be allowed to ask one follow-up question. Once again, if you would like to ask a question, please press star 1 on your phone now. We will now take our first question from Manav Patnaik from Barclays Capital. Please go ahead, Manav.

Hi, good morning. This is Ronan Kennedy. I'm from Manav. Thank you for taking my questions. Can I just ask with regards to the strong margin performance, can you assess or characterize the contributions from whether it's the smart truck, the Six Sigma, the engineering, the extracting of inefficiencies, but also how we should think about those as drivers in the context of the sustainability of the margins, if you could elaborate on that, please. Thank you for your question, Ronan.

It's when you think about the gross margin, it really starts with our culture, how we run our business, the expectations we have, the intensity of which we run it, and the focus. That being said, there's many, many inputs to those numbers. Certainly, our investments that we are making are paying off. The investments in smart truck, the investments in our Six Sigma team, the investment in our engineering team, the investment in our supply chain organization are all helping us to improve those results. So I can't give you an exact number with, hey, smart truck gave us X basis points, what have you. There's many inputs and we're pleased with the investments that we've made and we're pleased with the leadership and the culture of the organization where they're focused on driving those results, providing a better experience for our customers and providing a better experience for

our employee partners. That's helpful, thank you. And then

with regards to, obviously, strong performance on the top line as well, can you just talk about the contributions from new business and penetration versus expectations, how pricing is trending and also retention,

please? Yeah, good question. So when we think about our growth, again, there's many contributing factors. We really like where we are from a gross standpoint. The internal growth, certainly, we like the acquisitions that we've made, really good businesses. But when we think about the components of it, certainly pricing is a component, but it is not the majority. The majority of our growth is from volume growth and that's really pleasing to us because we want to be able to grow our business in that manner. Pricing has moderated and it's much closer to historical and that's exactly what we had planned throughout the year. Where we're really benefiting is from our new business. Our team is performing at a high level. Our service organization is, the retention levels are very attractive. And then we are cross-selling appropriately. We have a great breadth of products and services that we want to make sure that our customers and our prospects are aware of. So we're benefiting kind of across all, not kind of, we are benefiting across all of those areas and they're all big contributing factors. But we like where we are and

we like how we're growing the business.

And our next question comes from Joshua Chan from UBS. Please go ahead, Joshua. Thanks,

Mike. Thanks for taking my questions. Could you talk about the, I guess piggybacking on the prior question, could you talk about the sustainability of growth that you're seeing now that pricing has moderated to a historical level? Do you see the current run rate staining based on what you're seeing out there talking to customers and retention rate dynamics and all that?

Yeah, Josh, good morning. Again, we like where we are from a growth standpoint. And the exciting thing is there's, we service a little over a million customers. There's 16 million businesses in North America. So we think there's an incredible runway for us. So we're selling to about 60% of our new accounts come from no programmers and that is continuing. So we're seeing great results from talking to prospects and showing them a better way to do it than they are today. Now, that doesn't necessarily mean that that is new spend. They might be spending that money somehow. It's just we're redirecting it to do it better, smarter, faster, in some cases even less expensive than the way they're doing it. So we think the runway is very attractive because of the number of prospects that are out there. And our business, or excuse me, our buying proposition resonating with prospects and customers. So we expect that we like where we are from a growth standpoint. As I mentioned, we like how we're growing and we want to continue in that manner.

That's great, Tyler. Thank you. And for my follow up, you talked about incremental margins being in the 20 to 30% range historically. And now you're sort of at the higher end of that in recent years. Is this the right level of incremental margins going forward on revenue growth that comes ahead?

Yeah, so we recognize the mass of 20 to 30% incremental margins. We need to be the higher end of that in order to continue to improve our margins. And we're focused on doing that. We're doing so by extracting out those inefficiencies, getting really good leverage on our revenue growth. So many, many ways. But running a business is not linear. And so we know there's going to be some puts and takes and some quarters will be higher and some won't be as high. But generally speaking, we like that range and I prefer the higher end than the lower end, that's for sure.

And our next question comes from Heather Balsky from Bank of America. Please go ahead, Heather.

Hi, thank you. I was hoping you could just talk about the M&A you did this quarter, kind of what attracted you to the asset, and then an update on how to think about M&A going forward.

I'm certainly happy to start, Mike. Regarding, Heather, good morning. Regarding M&A, so it's an important component for us. You certainly cannot pace M&A. So they kind of come as they do and it takes two to dance. But I can tell you the two that we announced this past quarter are great businesses, first off. Really good operators, really attractive businesses. In the case of the one in Kentucky, it provided us with some needed capacity in that region of the country. And in addition to the added capacity, we were able to absorb that volume into seven of our facilities. So some really nice synergies allows us to, as we're closer to the customers, to spend more time with the customer and less time driving. So that's important to us. In the case of the acquisition in the M&A in Pennsylvania, we did not acquire any additional capacity, but in that case we were able to absorb it into 16 of our facilities. So again, attractive synergies, more time with the customer, less time driving. And in those cases, we also then get to talk to our new customers about the broader breadth of products and services that we have. So we think it's overall, it's very attractive. As I mentioned, it takes two to dance. You can't pace it. But in this case, these were two really attractive businesses, great operators that really made sense for us.

Maybe a couple added points. As Todd said, these are great acquisitions and we've had a handful of them this fiscal year. Each of the two that Todd talked about is less than $20 million in annual revenue. The $17.4 million that we gave you in our prepared remarks includes the impact of those. But keeping in mind, we've made acquisitions all year long. And so that fourth quarter impact would include all of the acquisitions we've made throughout the last 12 months. Just something to keep in mind as you're thinking about our fourth quarter.

Thank you, appreciate it. And our next question comes from Andy Whitman from RW Baird. Please go ahead, Andy. Andy, is your line muted? I'm sorry

about that. Mike, I just want to build on that last question where you were commenting on the M&A contribution. Is there any, in your fourth quarter guidance, is there a change in your fundamental outlook for the company recognizing that it is up now somewhat on these two somewhat larger acquisitions that you did? And then as an addendum to that, was this 60 basis points or $45 million legal settlement that you just talked about, was that included and considered in your initial guidance or are you absorbing that and still able to raise your guidance here? Yeah,

so, Andy, I already forgot your first part of the question. What was the first part?

First question is, does your fundamental outlook for the business unchanged? Does your fundamental outlook unchanged for 4Q or is there a change? Yeah, I apologize.

No, as Todd talked about, our market remains very large. The momentum in the business remains good. The adoption remains good. And the guide for the fourth quarter is right where we want to be in terms of sort of the stated profile of growth that we want to have. And so all of that put together with not really any change in customer behavior would mean, no, continued performance like we've seen and we continue to like the momentum of the business. As it relates to your second question, the 60 basis points, that was not contemplated in the initial guide from the beginning of the year and that was simply absorbed through, well, in this third quarter, the 60 basis points simply absorbed.

Okay, thank you. That's all my questions for today.

And our next question comes from George Tong from Goldman Sachs. Please go ahead, George.

Hi, thanks. Good morning. Can you provide an update on the external selling environment, including how client budgets and sales cycles are performing?

Yeah, I'm certainly happy to start. George, good morning. We haven't really seen much of a change in sales cycle. You know, as far as our, you know, the interest in our products and services remains good. We're always continuing or continuing to invest in new products and services, tweaks, I guess, certainly to them to make it as attractive to the prospects and the customers as possible. But, you know, we're not seeing a change. Momentum continues to be good. Outsourcing still resonates. And we're seeing, as I mentioned earlier, the no program market is still really, really large. And we've become pretty darn proficient at presenting to those prospects to help them run a better business. And we help them with all the products and services we provide. And as I mentioned, it's not always new money. Usually they're spending something, it's just redirecting it to us to do a better, faster, smarter, cheaper type thing.

Got it. That's helpful. And then separately, can you talk a little bit about your focus verticals, including healthcare? How much additional runway is there for these focus verticals to serve as a tailwind to organic revenue growth?

Yeah, so, George, it's in our internal growth. So it is helping us, that focus is helping us, you know, to organize around the customer and provide the products and services that they want. And that has, it's been a good strategy for us over the past number of years. So we like all the verticals we're in. We find them very attractive, whether it's healthcare, hospitality, health care, hospitality, education, state, local government, business, it's all attractive and we're organized around it. And our value proposition is resonating with them.

And our next question comes from Tim Mulrooney from William Blair. Please go ahead, Tim.

Hi, good morning. This is Luke McFadden for Tim Mulrooney. Thanks for taking our questions today. I wanted to ask too, just on first aid, I'll start with the first one and then move on to the second one after. But first aid and safety has been grown at a double digit rate for quite a few quarters in a row now. I know there's a penetration story here with your established base of uniformed customers, but I'm also curious if new product introductions are an important driver of this growth. How much of your growth in that segment is from new product introductions?

Good morning, Luke. We really like the first aid business. Part of our culture is continued innovation, so we're always looking at improving our facilities, improving our processes, improving our products, improving our services. So it's always a component. I cannot give you a number of, hey, it was X basis points of growth due to a product rollout or what have you, but I can tell you this, the value proposition in the first aid business and all of our businesses, but in first aid as you asked about, it's really resonating. And the mix of business that we have there is really good. And we're able to be better sources, better providers of products with our investment and our distribution center. So when you have a robust supply chain that allows us to get products to the customers in a really timely fashion, it puts us in a great spot to be successful. And so yeah, cross-sell, we're absolutely, we want all of our customers, whether they're uniform or fire or direct sale customer, we want them all to know about our first aid business. And we try to make sure that that occurs in many different conduits, but yeah, we're benefiting from that cross-sell.

Understood, really helpful. And maybe just sticking on first aid and safety here, as you think about that segment of your business, does it feel like you've essentially built out the full suite of products and services there, or at some point should we expect to potentially hear more about other product introductions as you continue to build out the portfolio? The room here for more is essentially what I'm curious to know.

Yeah, Luke. Yeah, again, I'll go back to our culture. Our culture is such that we are constantly innovating and pushing ourselves to be the, to provide the best products and services. And so you'll see more of that to come. We're constantly innovating to put our partners in the best position, our employee partners in the best position to provide the most value for our customers.

And maybe one added comment, Luke, when we think about this business, you know, you may have heard us speak to umbrellas of image safety, cleanliness and compliance. And when we think about this business, safety is a fairly large umbrella. And when our first aid and safety people are speaking with customers and thinking about that innovation that Todd talked about, we're thinking quite broadly about how do we keep our customers, how do we help our customers keep their employees safe? And that can mean opportunities into the future. And that's the way we look at

it from a broad perspective.

And our next question comes from Andrew Steinerman from JP Morgan Securities. Please go ahead, Andrew.

Hi. In the quarter, when you look at your rentals and facility services segment, how much of the growth is actually coming from uniforms versus ancillary services directionally? Like, is there good growth in both? And also if you can make a comment about ad stops within uniforms.

Good morning, Andrew. As you know, we don't give out those specific numbers, but directionally to your question, yeah, we're seeing growth across them at all. There's good demand for our uniform business and our facility services business, frankly, for all of our business products and services. So, you know, so nothing to point out to one particular area there. As far as ad stops, you know, there's of, we haven't really seen a change to our customer behavior there. So it's, I'll call it kind of business as usual. You know, you're, there's many inputs to that number, but nevertheless, I'd say it's kind of business

as usual. Thank you. Yes, sir.

And our next question comes from Jasper Bibb from Truist Securities.

Please go ahead, Jasper.

Hey, good morning,

guys. I wanted to follow up on the earlier discussion on first aid. The gross margin there was really impressive at 56% this quarter, but you also had SG&A up 25% from the prior year. So could you provide just maybe a bit of color on the investments you're making in that business? And when do you think the first aid segment should start to deliver a bit more margin leverage over that G&A base?

Yeah, Jasper, good morning. As I mentioned, we really like the business and it's performing really well and we're investing appropriately. The, you know, there's the amount of prospects out there is, are massive. And to Mike's point earlier, the value proposition is resonating. You know, we talk about the mantra in that business is what's more important to a business than the health and safety of their employees and their customers. So that is resonating. We're in a great position to invest to provide those products and services. So we're doing just that. And so we're investing in selling resources. We're investing in marketing resources because we really like where we are and it makes sense to invest. And I think you're seeing it show up in the operating margin and the gross margin.

Yeah, we've each quarter this year has been 22% or higher, which is quite a big improvement from a year ago. And so as Todd said, these and, you know, we want to continue to invest in the long term growth of all of our businesses. And you can really see those investments playing out, particularly in the gross margin line of first aid and safety. But we love the margins. They're up quite a bit over the last few years and we'll continue to invest as we see appropriate.

Thanks. It makes sense. And then just was hoping to get an update on what you're seeing for expense growth on labor and fleet related costs in the quarter.

Jasper, good question. Certainly labor is an important component. You know, we want to make sure that we're providing attractive wages, competitive wages. And we've spoken on previous calls that we were not flat footed when it came to, you know, the wage inflation that I'd say North America has seen over the past few years. So we've been in a good position and we like where we are from that perspective. And here's what's really exciting is we have mentioned earlier our Six Sigma teams, our engineering teams. They're helping us to automate certain items to bring transformation technology to portions of our business, whether it's smart truck or plant efficiencies that allows us to mitigate that subject as best as possible. And so we're investing and have invested for years in those organizations and it's paying off in what we're seeing with our total labor costs as we manage through and make sure we're still in a really good spot to be competitive and attract the very best people.

And our next question comes from Ashish from RBC. Please go ahead, Ashish.

Thanks for taking my question. I just wanted to focus on the Google partnership. I was wondering if you can provide an update on that front. I believe you've already migrated your SAP onto the GCP and how should we think about those benefits that you may have seen in the quarter but also benefits as we go forward.

Good question, Ashish. I would characterize, well first off, we have a great relationship with Google. You're correct, we did migrate to the Google Cloud platform. And I would characterize it as we're in the early innings there. And so we certainly hope to maximize our relationship and put our employee partners in a position to provide more value and to be as successful as possible because we believe there's tools that will be available to us to provide more value to the customers and to put our people in a better position to provide that value which makes them more successful. So early innings but we're optimistic about where that can go.

That's a very helpful color. And if I can ask a quick accounting clarifying question. So within the balance sheet, the uniform and other rental items and service that moderated sequentially quarter to quarter. I was just wondering if you can provide any color on what's driving that. Is that better efficiency or any color on that front? Thanks.

Yes, I talked a little bit about how we are working on all pieces of the business, but certainly one of those is inventory and he touched on a little bit of garment sharing. So you can think about when we improve garment sharing, for example. We don't need to inject as many new garments into that in-service inventory. So the more sharing means better utilization of our existing in-service inventory and it means we don't have to add as much into the I think improved sourcing, as well. Volume growth as Todd said remains really strong and so what we're seeing is some nice offsetting of the volume growth with

some of these initiatives.

And our next question comes from Stefanie Moore from Jeffreys, please go ahead, Stefanie.

Hi, good morning. Thank you. I wanted to continue the discussion on the pretty impressive margin front for the quarter. I appreciate the color in terms of kind of discussing the route optimization, the merchandise management, Six Sigma, you know, the likes. But maybe if you could provide a little bit of color on of your major initiatives, which ones do you think are kind of still in the early innings or we could kind of continue to see some, you know, more improvement or accelerated improvement and then, you know, What is next for you guys, you know, in terms of other areas of opportunity that haven't been as major part major focus yet. Thank you.

Good morning, Stephanie. You know, from our strategic initiatives that, you know, we're focused on, you know, how can we impact our business in total, certainly our material costs, our energy, our labor. And you know, Mike's referred to earlier, our energy spend is down 40 basis points. That's not all just price. That is those initiatives that we referred to earlier. The material cost is, you know, our two largest costs are material costs and labor. So we're very focused on driving efficiencies in all those areas because to Mike's earlier point, we love the volume growth, but we don't want to sacrifice margin because the volume growth is so robust that we've got these strategic initiatives to extract these inefficiencies out of our business. And I wouldn't speak to any one in particular that it's in the earlier innings or the others. We've got a nice runway for forward for doing that. A little bit of that is our culture is that we're constantly trying to innovate and push ourselves to be better. So I think you'll see that continued as far as acceleration. It's built in. We're constantly doing it. So I think we're focused on those incremental margins. And this is an important component of making sure we can hit those numbers.

Yeah, the only thing I might add is we're certainly in the very early innings of technology. And we believe there's a nice runway there. Todd talked about just the recent migration to the Google Cloud. And that creates a foundation for us to do some interesting

things moving forward. Great. Well, thank you so much. And

our next question comes from Scott Schneeberger from Oppenheimer. Please go ahead, Scott.

Hey, good morning. It's Daniel from Scott. Thanks for taking our question. Could you please speak to the outlook for uniform direct sales and fire protection as well as some perspective on the margins for all others going forward, please? Thank you.

I'll start on the outlook. And Mike, if you want to speak to the margins. The uniform direct sales business is strategic business for us. We have some really large strategic accounts, whether it's national accounts or in the hospitality, gaming area of our business. And so strategic meaning that those customers spend a lot more money with us, not just with garment direct sale, but also outside of that. So that's important. That being said, that business certainly can be a little lumpy due to the nature of it with rollouts and purchases. But we like where we're positioned there. We like the value proposition that we're where we are there. So we think the outlook is very positive there. As far as the fire business, it's been a great business for us. The results over the last several years, we've seen great revenue growth. We've seen great margin improvement. And it's the only business we're in where you legally have to have those products and services. So we think it's the outlook is really positive because of the prospects that are out there and the runway we see for opportunity. So Mike, if you want to comment on margin.

Sure. So as Todd said, the fire business in particular, the margins have increased quite a bit in the last handful of years. And we've seen a lot of the same initiatives and other initiatives specific to that business really take off like we've seen in our other businesses. The one thing I might point out there, we did see some increase in SG&A and the fire business year over year. And we're starting to get into that SAP implementation for the fire business. So we might see a little bit of pressure as we move into fiscal 25 on the fire margins, the overall margins because of that investment and that move. But as you've seen with our rental and first aid and safety businesses, once we understand how to use that and get proficient at it, it can create some really nice opportunities. So maybe a little bit of, we've seen some great improvement, maybe a little bit of next year and the following year pressure on SG&A because of that implementation. But we certainly expect those margins to continue to improve in the longer term. From a uniform direct sale margin perspective, you know, as Todd said, that business is going to go up and down. It's going to be a little bit bumpy from quarter to quarter. And because of that, the margins will be as well. So I don't think there's anything specific to call out other than it isn't quite as consistent of a business as

the other three that we have.

Thank

you. And our

next question comes from Shlomo Rosenbaum from Steve Winnicklund. Please go ahead, Shlomo.

Hi, thank you for taking my questions. Hey Todd, can you talk a little bit about the macro environment with regard to employment and specifically if you could touch upon some of the areas where they're looking for more automation to reduce the employment due to raises in minimum wage in areas like California. How exposed are you to those kind of verticals? And then after that I would follow up.

Good morning, Shlomo. Yeah, from a macro environment, as I mentioned, we haven't seen much change in our customer behavior. Certainly there is always some puts and takes. And as you mentioned, our employers are under pressure to figure out ways to automate things because wage inflation, that has occurred and will continue to occur. It's occurred for many, many years. Now, there's also some, you know, the infrastructure bills that are out there, the on-shoring. You know, I can't speak to, you know, specifics of, oh boy, we're benefiting from this or this is a headwind here. But generally, we like the spot we're in. And we think it's, you know, the macro environment where it's been reasonably stable. And we find that attractive and we can be really successful in that environment.

Okay, thank you. Just for a follow-up, you have a competitor that was spun out, say, six months ago. And I was just wondering, has there been any change in the environment with them competitively in terms, either positively or negatively? I mean, have you seen any changes in the way that they bid? Are you taking more business from them? Maybe you could just comment in general.

Yeah, Shlomo, I would characterize it as, you know, it's pretty well business as usual. They're a very good competitor, always have been. I'm sure they always will be. And we have a great deal of respect for them. And it's a very competitive environment. Always has been. As far as, as long as I've been with the company, it has been. And I'm sure it will be in the future. And, but we're focused on putting our employee partners in the best position to be successful in providing our customers the best value proposition. So really none of that has changed.

And our next question comes from Kartik Mehta from North Coast Research. Please go ahead, Kartik.

Yeah, thank you. Hey, good morning. Todd, you know, you have been able to execute extremely well this year, beat guidance. And as you look at the business, is that the result of maybe metrics like non-programmers being a little bit better than you thought? Is it sales being better than you thought? Maybe you're just more cautious about the economy than actually happened. You know, if you look at why you've been able to do better, what would you point to?

Yeah, Kartik, it starts with our culture and our expectations of our employees. We're focused on our employee partners and the pace and the intensity of which they run. But that being said, our value proposition is really resonating. And each of the businesses we're in, the first aid business we spoke about, you know, it's very good. Outsourcing is resonating nicely. Maybe it has to do with, you know, it's not as easy to hire people as it has been in the past. So if you want someone to outsource it, it's that much more attractive. We like the spot we're in. And we have exceeded our internal expectations. And we're pleased with that. But there's so many inputs to it because we're trying to focus on providing better products, better services, better technologies to make our people more successful and to make our customers that much happier. So a lot of inputs, but we like where we're positioned and we're continuing to invest for the future.

And just one follow-up. You know, you obviously discussed M&A a lot. I'm wondering, and I know some of these acquisitions can take years to come to fruition. But as you look at the market today, are you seeing any change in the pricing environment, maybe what expectations are from sellers? Or has it remained about the same?

Yeah, Carter, good question. I wouldn't speak to any change there. It's more about, you know, certain events might cause them, whether it's an owner's age or succession or there's many different life events that would cause them to make a move. And it's more about that, to your point. It's, in certain cases, these are decades in the making. And, you know, you can't really pace them. But when they are ready, we're ready. And we're highly acquisitive, very interested in M&A from all shapes and sizes, big, little, medium, everything in between. We think it's, we're very interested.

And our next question comes from Tony Kaplan from Morgan Stanley. Please go ahead, Tony.

Thanks so much. I wanted to ask a question on the focus verticals. Are you able to share sort of the growth between focus verticals versus non-focus ones? And how do you assess whether to add a new vertical into that sort of focus designation? Is there a different -to-market strategy for focus verticals as well?

Yeah, good morning, Tony. Well, I'll say this about our focus verticals. I certainly expect them to grow faster than the business in general. And when you have an organized approach and you're organized around a customer base, you certainly expect that. And we've chosen what we think are really good verticals that are very attractive. So, yeah, I can't give you a specific of, boy, it's adding X amount of basis points to our total growth. But we think we've chosen well. And we're always analyzing what's, should we have another one or should we not? And what's the best way? And it really gets down to what puts our employee partners in the best position to be successful and what creates the most value for the customer base. So we're looking, we're evaluating, always doing that. But we like where our investment is at this point.

Terrific. I wanted to also ask about your marketing budget and whether you've increased that year over year. I recently heard some Cintas commercialism, Bloomberg Radio, for example, just wondering if that's coincidence or if there's been a greater push towards more marketing. Thanks.

Yeah, Tony, first off, thank you. I'm glad to hear that. The algorithm's working and it's hitting our target audience. So I wouldn't say there's been a step change there. It's just trying to be, you know, make sure our investment is well placed. And we're trying to leverage analytics and technology to make sure that the investment is deriving the very best ROI as possible. So it's just a matter of tweaks versus a step change in investment.

Terrific. Thanks a lot.

Thank you. And at this time, there are no further questions. I'd like to turn the call back over to Jared for closing remarks.

Thank you for joining us this morning. We will issue our fourth quarter of fiscal 24 financial results in July. We look forward to speaking with you again at that time. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.